Does CEO pay dispersion matter in an emerging market? Evidence from China's listed firms

• Examine institutional factors influence CEO pay dispersion and incentives in China.
• CEO pay dispersion generally provides tournament incentive.
• The incentive is weaker in SOEs and political connection but stronger after reform.
• Multiple goals in SOEs reduce the effectiveness of tournament incentive.
• Managerial agency inherent in private firms mitigates tournament incentives.

This paper examines how the institutional features of emerging economies (i.e., government ownership, political connections, and market reform) influence CEO pay-dispersion incentives. Consistent with our expectation, we find that CEO pay dispersion generally provides a tournament incentive in China's emerging market, as it is positively associated with firm performance. In addition, tournament incentives are weaker where firms are controlled by the government and where the CEO is politically connected, but it became stronger after the China's split-share structure reforms. Further, we find that in state controlled firms the satisfaction gained by meeting multiple economic and social goals largely reduces the effectiveness of tournament incentives, while the managerial agency problems inherent in private firms might mitigate them.